Testamentary trusts are created by a will to provide a greater level of control over the distribution of assets to beneficiaries. There are also tax advantages available through testamentary trusts, making them an effective estate planning tool.

There are two commonly utilised types of testamentary trusts:

Discretionary testamentary trusts.

Executor gives the beneficiary the option to take part or all of their inheritance via testamentary trust. The primary beneficiary has the power to remove and appoint the trustee and they can appoint themselves to manage their inheritance inside the trust. Learn about the key people in a discretionary testamentary trust.

Protective testamentary trusts.

Beneficiary must take their inheritance via the trust and does not have the option to appoint or remove trustees. May be useful where the beneficiary is not in a position to responsibly manage their inheritance due to age, disability or spendthrift tendencies.

Benefits of testamentary trusts

The main benefits of testamentary trusts are their ability to protect assets and to reduce tax paid by beneficiaries from income earned from the inheritance.

Learn about how Lakeside Financial can help ensure your assets are administered with minimum taxation liability and maximum asset protection by using appropriate trusts and investment structures.

Reducing tax using income splitting

If a beneficiary takes their inheritance in their personal name, they will pay tax on the income generated from their inheritance at their personal marginal tax rate.

There may be significant tax advantages in taking an inheritance through a testamentary trust, particularly where the beneficiary has:

a high personal marginal tax rate

a partner on a lower income

minor children and grandchildren; and/or

a tax free threshold to $20,542

children or grandchildren with no, or lower, taxable income.

Protecting your assets

A common and sensible objective for all Testators is to ensure that each beneficiary’s inheritance is protected and preserved from:

waste and dissipation by the beneficiary

claims on the beneficiary’s assets due to marital or commercial breakdown.